Income to House Price Ratio Nearing Pre-Crash Levels

A major macro-research consultancy firm has released a report on the UK housing market, warning of the potential for the bubble to burst following a rate rise, whenever that may come.

Currently, the average property price in the UK is 6.1 times larger than the average annual income. This, says Fathom Consulting, is close to the 6.4 peak seen just before the financial crash.

The average property in the UK currently costs £292,000, going up to £552,000 in London, following years of accelerated growth. Average income, however, sits a little under £30,000.

“The UK’s house price to income ratio has been inflated to within a whisker of its pre-recession peak, and is well above its long-term average” Fathom said.

In order to return to a more balanced and average level, with house prices closer to 3.5 times average earnings, “property prices would need to fall by up to 40%, or household income grow at ten times its current pace for the next five years”.

Growth in house prices has been fuelled largely by increased demand due to cheaper borrowing costs over the past few years. Consistently low interest rates and various government schemes like Help to Buy have helped boost demand which has in turn boosted prices. Fathom warn that given this trajectory, the next rate rise, whenever it does come, could cripple the “fragile arithmetic” underpinning the market.

“Since 2013” Fathom said, “The demand for housing has been turbocharged by chancellor Osborne’s help-to-buy policy and the search for yield – which has resulted in the accumulation of housing wealth as an investment alternative for low-yielding financial assets. As a consequence, house prices are now close to an all-time high of more than six times disposable income.”

The Bank of England’s base rate has stayed low at 0.5% for seven years now, fuelling this low cost borrowing. The Bank is now caught between a rock and a hard place, according to Fathom, since raising rates soon could trigger a rapid deflation of the current bubble, and any delay could prolong the inevitable.

A rate rise too soon, they say, could lead to “rapid correction in the UK housing market and compound the slowdown in economic growth.”

As such, they predict a hike not to come until 2018 at the earliest.

However, they went on: “Real mortgage rates will not remain as low as they are today, and when they do rise, the fragile arithmetic supporting the elevated house price to income ratio will unravel.

“All the while, ‘lower for longer’ rates of interest are inflating the housing bubble and worsening the inevitable correction.”